Issuance of LC surges with end of embargo

- Post Report, Kathmandu

Mar 9, 2016-

The pace of opening letters of credit (LC) by importers has surged over the last one month following the end of the Indian embargo. Banks had largely stopped issuing LCs during the blockade when piles of Nepal-bound cargo lay stranded in Kolkata port and bordering Indian towns. 

According to bankers, the volume of LCs issued started to pick up after January following an easing of border restrictions, and has reached near normal levels at some banks and even exceeded the usual figure at other banks.  

Banks value the LC business because it is a fee-based business for them and importers also obtain trust receipt loans for import financing which allows them to make interest earnings.

Nepal Investment Bank Limited (NIBL), one of the leading banks in the LC business, said the trend of opening LCs had surged over the last one month after the end of the embargo. 

Rajan Amatya, deputy general manager of NIBL, said that LC issuance had reached 60-70 percent of normal levels. “Currently, 10-15 LCs are being opened through our bank daily,” he said. 

According to him, NIBL had stopped opening LCs for nearly two and a half months during the blockade when Nepal-bound shipments were stuck in Kolkata and various border points.

Nepal Rastra Bank (NRB) had verbally asked banks not to open new LCs after the Nepal Consulate in Kolkata asked the central bank and the government to stop issuing them as imports were piling up in Kolkata during the height of the blockade 

“We had followed the central bank’s informal instruction,” said Amatya. NIBL has been involved in opening LCs for imports of merchandise and industrial raw materials particularly for industries like iron and steel, cement and chemical fertilizer. 

Likewise, Standard Chartered, another leading bank involved in the LC business, said that the volume of LCs had surged past usual levels. Diwakar Poudel, head of brand and marketing and corporate affairs at Standard Chartered, said an average of 10 LCs were being opened daily which is higher than the pre-blockade figure. 

According to him, the bank witnessed a slow rise in the number of LCs since December 2015 when the embargo was loosened. The blockade was lifted in the first week of February. 

“As all the development projects are yet to start, we are hopeful that there will be a further surge in the number of LCs opened in the days to come,” he said.  

Standard Chartered is mainly involved in issuing LCs for the import of industrial raw materials. “About 60 percent of the LCs opened at Standard Chartered are for imports from India and the rest for imports from third countries,” he said. 

As a result of the blockade, trust receipt loans extended by commercial banks decreased by 13.4 percent (Rs7.36 billion) during the first six months of the current fiscal year against a growth of 9.5 percent (Rs3.93 billion) during the same period of the previous year, according to NRB. 

Merchandise imports dipped 25.7 percent to Rs277.79 billion during the review period. Meanwhile, traders said that the volume of imports was lower than demand since importers were holding back because they feared another embargo by India. 

Dinesh Shrestha, vice-president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), said that traders were not yet confident that a blockade would not be imposed again. “So they have been importing limited quantities of goods to minimize the risks,” he added. 

Published: 09-03-2016 09:03

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